Trends: Dissecting The Digital Dollar – Step by step

As the UK’s Music Managers Forum publishes two new guides as part of phase three of its ‘Dissecting The Digital Dollar’ programme, CMU Trends summarises what we’ve learned from the project so far in 30 points – ten from part one, ten from part two, and ten from the new guides.

INTRODUCTION
Three years ago, MMF in the UK commissioned CMU’s music consultancy, CMU Insights, to produce the first of the ‘Dissecting The Digital Dollar’ reports. MMF did this because at that point the streaming business was starting to boom and the royalties coming in from the key streaming services were starting to become significant.

When those streaming services had first emerged some years earlier, they had required a very different licensing model to the a la carte download stores like iTunes, which were more of a digital equivalent of the CD selling business.

The record labels, distributors, music publishers and collective management organisations (CMOs) had constructed the required licensing model, and now the streaming business was expanding rapidly. But no one had explained how that model was working to the artists and songwriters, nor to their managers.

MMF wanted to advise the management community on what was going on, so that managers could better explain to their clients how the streaming royalties they were now due were being calculated and paid. And that was the remit of Part One of the ‘Dissecting The Digital Dollar’ reports.

Part One also raised a number of issues with the streaming business model. Some were issues for everyone in the streaming sector, including the digital service providers (DSPs) themselves, the labels, distributors, publishers and CMOs, and the artists and songwriters. Others were specifically issues for artists and songwriters and their managers.

MMF then staged a series of roundtable discussions in four countries involving stakeholders from across the music industry to discuss those issues. Part Two of ‘Dissecting The Digital Dollar’ was a summary of those discussions, with a number of proposals for how the management community in particular might tackle the challenges.

One of the outcomes of Part Two was the need to better educate artists and the management community about the different kinds of label and distribution deals that were now available, so that they could make informed decisions about who to work with on distributing and marketing their recorded music in the streaming age.

A second outcome related to the call from managers for more transparency in the streaming music sector. It was recognised that managers needed to be much more specific about what it was they needed to know from the labels, distributors, publishers and CMOs they worked with.

It was with these two outcomes in mind that MMF commissioned CMU Insights to produce ‘The Deals Guide’ and ‘The Transparency Guide’, both of which were published this week.

PART ONE: HOW STREAMING SERVICES ARE LICENSED
Understanding the streaming licensing model requires some understanding of copyright law, of record and publishing deals, and of collective licensing. Here are the ten key things you need to know.

1. There are two sets of music rights
Whenever you write a song you create a song copyright. If you then make a recording of that song, you create a separate recording copyright. So, the music rights industry controls and represents two sets of copyright, the song rights and the recording rights.

Although many artists both write and record music – and although many music companies have one division dealing in songs and another in recordings – the two sides of the music rights business operate pretty autonomously from each other.

So, artists appoint record companies to represent their recording rights, and music publishers to represent their song rights.

As a streaming service streams recordings of songs, it is exploiting both sets of music rights. Which means it needs licences covering both. Which means it will need to negotiate licensing deals with both the record industry and the music publishing sector.

2. Copyright provides a number of ‘controls’
Copyright law provides copyright owners with certain controls over the content they own – which means they can control what happens to their content.

The exact list of controls varies from country to country, though commonly includes: the reproduction control, the distribution control, the rental control, the adaptation control, the performance control and the communication control.

In the music industry it is common to group the reproduction and distribution controls together and call them the reproduction rights or – in music publishing – the mechanical rights. It is also common to group the performance and communication controls together and call them the performing rights or – increasingly in the record industry – the neighbouring rights.

Copyright makes money whenever a third party wants to exploit a copyright owner’s controls. If you want to reproduce, distribute, rent, adapt, perform or communicate someone else’s song or recording, you must get their permission. The copyright owner charges you for that permission, and that’s how they make money. Permission giving for money is called licensing.

When the third party is getting a licence, they will usually need to state which of the copyright controls they wish to exploit. The nature of the deal – and even who they do the deal with – may differ depending on which controls they are being exploited.

3. The music industry licenses directly and collectively
At a basic level, if someone wants to make use of a song or recording, they must identify the copyright owner or owners, get in touch with them and negotiate a bespoke deal. That is direct licensing. However, in some scenarios the music industry licenses collectively.

With collective licensing, all the rights owners put their respective copyrights into one pot and appoint a central organisation to negotiate on their behalf.

That central organisation may be called a collecting society, or a performing rights organisation (PRO) or a collective management organisation (CMO). The CMO then does the deal and collects royalties from the licensee, passing the monies on to artists, labels, publishers and songwriters based on usage.

In most countries there are separate collecting societies for recording rights and song rights. And in some countries – on the songs side – there are also separate collecting societies representing mechanical and performing rights.

4. Streaming exploits both the mechanical and performing rights
This adds to the complexity of digital licensing. Whereas pressing a CD exploits only the mechanical rights and playing a track on the radio exploits only the performing rights, it is generally agreed a stream exploits both elements of the copyright.

This is a particularly important point in countries where – on the songs side – mechanical and performing rights have traditionally been licensed separately by different entities.

5. Record labels usually license digital services directly
This means that the streaming services need to do direct deals with the record companies, rather than dealing with a collecting society.

This usually means doing a deal with the three majors – Universal, Sony and Warner – and then with an organisation called Merlin, which negotiates a template deal on behalf of about half of the world’s indie labels.

The streaming service would then usually get access to the music of the other indies and DIY artists via aggregators and distributors.

So, as a streaming service, you need to do your direct deals first, and then negotiate additional deals with all the collecting societies, including – in some countries – one collecting society for mechanical rights and another for performing rights.

Though the CMOs are now starting to form ‘hubs’ so that you can get deals with multiple societies via one set of licensing negotiations.

7. Streaming deals are ultimately revenue share
Every label, distributor, publisher and collecting society does its own deal with every streaming service, and the terms of all those deals are different and often secret.

However, in the main, labels and distributors will generally negotiate a revenue share from the DSP of between 50% and 60%, while publishers and the song right CMOs will be on a revenue share of between 10% and 15%.

8. But it is revenue share based on consumption shareThat means that every month a service like Spotify works out what percentage of overall streams came from any one label or distributor.

Let’s say one label’s catalogue accounted for 10% of all streams. Spotify would then allocate 10% of its overall revenues to that label. It would then share that sum of money with the label based on its revenue share agreement. So, if the label was on a 50% revenue share deal, it would pay half of the money allocated to the label’s catalogue to the label.

The service then repeats this process with every label, distributor, publisher and CMO – hoping that there will be about 30% of its overall revenues left on the table at the end of the process.

9. There are other elements to the deal
Although at their core, the streaming deals are revenue share arrangements, there will be other parts of the deal too. With a new service, the label might ask for equity in the business and upfront fees to set everything up. Labels and distributors will also often ask for an advance – a lump sum of money up front.

But perhaps most important are the minimum guarantees. A label, distributor, publisher or CMO might demand a minimum rate per-stream, or per-user, or per-month.

After the revenue share calculations described above have been done, the service has to work out what the label, distributor, publisher or CMO would have been due based on these additional minimum guarantee agreements. If the sum being paid based on revenue share is less than the minimum guarantee, it must pay the higher amount.

10. The streaming service doesn’t always know who to pay
When it comes to the recording rights – a streaming service assumes that whoever uploaded the content to its platform owns the copyright, and is therefore due payment when those tracks are streamed.

However, the label or distributor doesn’t control the song rights, and doesn’t tell the DSP who does control those rights. Which means the streaming service doesn’t know who to pay the song royalties to. To that end, the streaming service relies on the music publishers and CMOs to work out what they are due.

The streaming firms send the publishers and CMOs a list of every track that has been streamed, and said publishers and CMOs must then tell the digital platform which contain songs they control.

PART TWO: ISSUES WITH THE MODEL
As mentioned above, there are a number of issues with the streaming business model, and this is what Part Two of ‘Dissecting The Digital Dollar’ focused on.

1. There are numerous issues with the model
Part Two focused in particular on seven issues with the streaming business as it currently functions. There are certainly more than that, but those seven are the key challenges. Some are specifically issues for artists and songwriters, others for the whole business.

From a management perspective, some of these challenges can be met through education and learning. Some can be met by collaborating with and putting pressure on the labels, distributors, publishers and CMOs. Some will require the music community at large lobbying the DSPs. And some may require the help of lawmakers and government.

2. The digital pie debate
One issue is how streaming income is shared between the different stakeholders. Currently, 50-60% goes to the recording rights, shared between labels and artists. 10-15% goes to the song rights, shared between publishers and songwriters. And the DSP keeps about 30%.

Actually, because of the above mentioned minimum guarantees, the DSPs often keep much less than 30%, which is in itself an issue. None of the streaming services are currently profitable, which is obviously untenable. Everyone needs the DSPs to succeed, and those services argue that they ultimately need to keep at least 30% of their revenues to assure long-term success.

But what about the split between the recording rights and the song rights? The labels see more because they take the risk in making, distributing and marketing the recordings. Most people do agree that the label takes more risk and so should see more money. However, should the recording rights get four to six times more money than the song rights?

Most managers reckon that the song rights should get a bigger cut of the money, but there isn’t necessarily a consensus on how the splits should be realigned. Though, it should be noted, that in the decade that the streaming business has been operating, there has been a slow shift of a few percent from recordings to songs, with the labels’ revenue share going slightly down and the publishers’ revenue share going slightly up.

3. What the artist gets paid
Labels and artists share between them the 50-60% of streaming income allocated to the recording rights. How the money is shared between label and artists depends on each artist’s record or distribution contract. With a classic record deal, the label will likely keep 80-85% of the income. They may also be able to apply deductions to the money that comes in before calculating what the artist’s 15-20% is worth.

Managers reckon that artists should, in the main, be seeing more than just 15-20% of streaming income, arguing that those royalty rates date from the physical age when the labels’ risks were much higher because they were pressing and distributing CDs. But how to achieve that increase for artists, given unsurprising resistance from many labels?

For new artists, it might be about managers shopping around more when choosing label partners, and considering the pros and cons of the new kinds of distribution and labels services deals out there that often offer much more favourable terms.

Though for heritage artists still locked into old school record deals, it may require a change to copyright law to allow those older acts to demand revised deals that are fairer in the context of the streaming age.

4. Performer Equitable Remuneration on streams
Under copyright law, whenever the performing rights of a sound recording copyright are exploited – which traditionally meant radio and public performance – any performers on a track receive a share of any royalties paid not subject to their record contracts, but at industry standard rates via a system called Performer ER.

This usually means 50% of monies paid going to performers – both featured artists and session musicians – via their collecting societies.

But what about streams? We know a stream exploits the performing rights of the copyright, so shouldn’t ER be paid on streams too? The labels argue “no”. The argument goes that a stream actually exploits a thing called the ‘making available control’, which is a subset of the aforementioned communication control that was added in the early days of digital. And although making available is a subset of the communication control – and ER is paid on communication – ER is not paid on making available.

Copyright law doesn’t actually state what controls a stream exploits. Whether or not ER is actually due on making available will depend on the wording of each body of copyright law. So there is plenty of room for debate on this issue. Either way, many artists – and especially session musicians – argue that ER should be paid on at least some of the income that comes in from the streaming services.

5. The lack of transparency
In most cases, a label, distributor, publisher or CMO – or likely a combination of those entities – sits between the DSPs and the artists and songwriters.

Artists and songwriters are therefore reliant on the labels, distributors, publishers and CMOs for information on how their music is being exploited on the streaming platforms, and how their royalties are being calculated.

Managers argue that they too often don’t have access to the data and information they need about how their artist’s music is being used and monetised in the streaming domain. Which means they can’t properly audit their clients’ income; or advise artists on which DSPs to champion; or on which labels, distributors, publishers or CMOs to work with; or on how to maximise their streaming income.

Most people in the music community agree there needs to be more transparency in streaming, and most labels, distributors, publishers and CMOs have been investing in portals to make more data and information available to artists and songwriters. Though most managers argue that, while there has been progress, much more needs to be done.

6. Should collecting societies handle streaming?
As mentioned above, generally the record industry’s CMOs are not involved in the streaming business, while the publishing sector’s CMOs do handle most digital licensing, except for the Anglo-American repertoires of the big five.

But should the record industry CMOs actually be more involved? Or should there be more direct licensing on the songs side?

Artist and songwriters generally like the idea of collective licensing. Partly because it often results in them getting a bigger cut of the money, and possibly being paid quicker. But also partly because many artists and songwriters think that everyone should be paid the same per stream rate, rather than the money you are due depending on the deal your label or distributor or publisher or CMO managed to negotiate with any one streaming service.

However, sometimes collective licensing can result in royalties going down overall, depending on how the CMOs are regulated in any one country. Plus there is the question of whether all the CMOs in the world are capable of administering streaming income.

Many managers say that, while on one level they – like their artists – like collective licensing, they are aware of the limitations of the collective licensing system, and so don’t necessarily have a problem with there being direct deals in the digital domain. Providing there is some transparency about those deals.

7. The copyright data problem
There is no one-stop publicly accessible database that will tell you who controls any one recording copyright, what song is contained within that recording, and who controls the song rights. This has added extra complexities to how streaming royalties are processed and paid. And has resulted in multi-million dollar lawsuits in the US on the mechanical rights side.

Everyone agrees that there should be a one-stop publicly accessible database of music rights information, though no one can quite decide who should build it and who would own it. That said, there is an assortment of initiatives underway in this domain – both within and outside the music community – that may as yet address this issue.

8. Safe harbours and opt-out streaming services
This has been the big talking point in recent years, because it is an issue where most people (though not all) in the music community are in agreement.

It’s the use of the so called ‘safe harbour’ in copyright law by platforms like YouTube to force labels and publishers into agreeing to much lower rates in their licensing deals, which means YouTube pays much less into the music industry than Spotify and Apple Music, even though it has many times more users.

Some managers are more favourable towards YouTube than most labels and publishers. However, the management community has generally supported the wider music industry’s efforts to have the copyright safe harbour reformed, so to put more obligations onto YouTube et al, in the hope that will enable the music rights companies to push up the royalties those services pay.

Most attention in this domain is currently in Europe, where EU copyright law is under review and safe harbour reform is on the agenda. Though it remains to be seen if that reform actually helps.

9. Adapting to the new model
In addition to the various challenges outlined here, there is the simple fact that the streaming business model is fundamentally different to the sales model of CDs and downloads. And the new model favours some artists and songwriters over other artists and songwriters.

The single biggest challenge is that, in streaming, with a new release, it’s no longer all about first week sales. Instead it’s about repeat listening.

Having people excited about your new music around release no longer brings in enough money, because the royalties paid on those initial few streams are nominal. To succeed artists needs fans to constantly return to their music on the streaming platforms, so that over time the royalties mount up, and the artist might ultimately go into profit.

That requires a new kind of music marketing, and everyone in the industry is still adapting to that new kind of marketing strategy.

10. Delivering a united message to fans
Many of the issues described here divide the music community. Though everyone is united by one thing – the need to keep streaming income booming long-term. As it currently stands, that means persuading more consumers to sign up to paid-for streaming services, which is where most of the revenue is generated.

Actually, to date, most of the marketing of premium streaming has been led by the DSPs rather than the music industry, and some of them have relied on their mobile phone partners to do the really big marketing pushes. But the music community needs to get better at not just telling people to listen to their latest releases, but to sign up to a premium streaming platform and to listen to their new music there.

Many artists are very pro-streaming and just need guidance on the messaging they should use when telling fans about their music. Certain technologies are also helping artists more easily direct their fans to their music on the paid-for streaming platforms.

Though some artists remain hesitant about the streaming business. This may be because the new model simply doesn’t work for them. But it may be because a lack of transparency means they don’t truly understand how it works. Or that unfair legacy record contracts mean they don’t share in the rewards.

Therefore it is in the wider music industry’s interest to address these issues, so that the music community can deliver a united message to consumers, and help streaming reach the scale it needs to reach in order to be a viable business long-term.

PART THREE: DEALS AND TRANSPARENCY

1. Digital innovation has been B2B as well as B2C
Although to music fans, the innovators in digital music have been the DSPs – so the likes of iTunes and Beatport in downloads, and now Spotify, Apple Music, Deezer and Tidal in streaming – there has been plenty of innovation behind the scenes too.

While digital distribution is in many ways easier than physical distribution, artists still need a business partner to help get their recorded music out into the world. This business partner would traditionally have been a record label.

However, as the record industry has shifted to digital we have seen new companies emerge that offer some of the services of a label but on very different terms. Meanwhile, some of the old school distributors – who used to primarily work for the indie labels that didn’t have their own distribution infrastructure – have now started to work directly with artists. And some have started to offer services beyond distribution.

Plus many labels have also set up ‘services’ divisions that work with artists on different terms. Though at the same time, those labels also continue to sign artists to what are pretty conventional record deals, with all the digital stuff also thrown in.

2. There are now ten key label/distribution deals available
In the MMF’s new ‘Deals Guide’, we distil all these new players, new deals and new options down to ten deal types. At one end you have the DIY distributor, which provides primarily digital distribution, for a nominal fee, and where the artists keeps all their copyrights and royalties.

At the other end, you have the classic major label deal, where the label partner provides a plethora of services – artistic development, product development, distribution, marketing, PR, sync etc – but will likely want copyright ownership and will keep the majority of the income.

3. There is more flexibility for artists to pick and mix
But how to choose which of these ten basic deal types to sign up to? Obviously, while every deal is slightly different, the basic principle is this: the more you get, the more you have to give up. So the more services a label partner provides for free, the more it is going to want in terms of rights and royalties. Artists and managers have to decide how many services they need to succeed, and balance that with what are they willing to give up.

The key point is this: with a wider range of label partners and deals now on the table, there is more flexibility for artists to pick and mix the services they receive, and to negotiate what they are giving up accordingly. Of course, if a label partner doesn’t provide a service, someone else will have to do that work instead – the artist, the manager, or another service provider – which also needs to be taken into account.

Where the artist has those other services already covered, there is now much more flexibility to find the right kind of label partner and label/distribution deal to suit the artist’s specific needs.

4. What you get is partly about contract and partly about trust
When an artist signs up to a label partner, there will be a contract that sets out what services the label will provide. The label is then contractually obliged to provide those services, and possibly to spend certain sums of money on that activity.

Though a label may well then go above and beyond what it is contractually obliged to deliver, especially if momentum starts to build around a certain release and the label decides to make it a priority.

This is arguably where more traditional record deals come into their own, because the more control the label has over rights and royalties, the more likely it is to throw more resource at a release than they are technically obliged to do so under contract.

Of course, the artist isn’t assured that they will become the priority release for a label, especially a major label that is working on a plethora of new releases at any one time.

5. Copyright ownership is a key concern
A key part of the deal between any artist and a label partner is who owns the copyright in the recordings covered by the arrangement, and for how long. Under traditional record deals, the label was the copyright owner, and often for ‘life of copyright’ (so 70 years in Europe).

There is now more flexibility on this point. Artists can give the label exclusive rights to distribute and monetise their records for a set time, but continue to be the actual copyright owner. Or they can transfer the copyrights to the label, but for a set period of time, after which the rights revert to the artist.

For established acts, there is now much more flexibility on copyright ownership. For new artists too, there are plenty of deals out there that allow the artist to retain their rights. Though the more services a label provides, and the more money it invests, the more likely it is to demand copyright ownership, possibly for life of copyright.

6. Transparency is a wide-ranging issue
There has been much talk in the music community about the need for greater transparency in the streaming sector. But who needs to be more transparent about what, exactly?

It’s important for artists and managers to be much more specific about what data and information they require to fully understand and capitalise on the potential of the streaming business.

DSPs, labels, distributors, publishers and CMOs are becoming more transparent in some ways, but there is still much more work to be done. If managers are more specific about the data and information they require, the artist’s business partners can’t get away with addressing one bit of the transparency issue and then saying: “There you go, now we’re transparent”.

In the MMF ‘Transparency Guide’, we identify 20 pieces of data and information that artists and managers require.

7. It’s partly about usage data
So, how an artist’s music is being consumed on the different streaming platforms. How often tracks are being played, the source of those plays and demographic information about the people streaming the music. This data is required to inform the artist’s wider business and marketing activity.

Good usage data starts with the DSP, which provides data to the label or distributor, which in turn passes it on to the artist and manager. There is an awful lot of usage data, so task one is identifying what data is useful, and task two is working out how to provide and present that data in a way that is easy to digest and understand.

8. It’s partly about royalty data
So, how much money an artist’s music is generating on each different streaming platform, and how much the artist is then due under their record or distribution contract. For artists with complex record contracts – and especially record contracts that pre-date digital – this includes a clear explanation of how old contract terms are being applied on streaming income.

Artists and managers need this information to audit the income they receive, enable financial planning, and assess the relative commercial merits of different DSPs.

Although people often talk about the ‘per stream rate’ paid by different streaming platforms, in reality the way streaming royalties are calculated is a little more complicated than that – as explained above – so simply knowing the number of streams doesn’t mean an artist or manager knows what streaming income their music has generated.

9. It’s partly about deal information
This is information about the deals done between the labels and distributors and the DSPs, which is used to calculate how much income is due to any one track, and which also provides benefits to the label and distributor beyond payments made on specific streams. So revenue share, minimum guarantees, equity, advances and fees. Artists and managers need this key information in order to audit their income and to assess which DSPs an artist should prioritise.

This is the most controversial area of the transparency debate. With usage and royalty data, the issue is generally about the label and distributor’s ability to share data – so it’s primarily a question of resource. With deal information, the issue may be the label and distributor’s willingness to share the information – so it may be a question of policy.

Different labels and distributors have different attitudes to sharing deal information with artists and managers, though all are usually bound to an extent by non-disclosure agreements in their DSP contracts.

Managers generally acknowledge that any commercial deals will be confidential, but argue that access to this information is so important for the artist businesses they help run, the music industry needs to find a way of sharing this crucial information with all the key stakeholders.

10. Managers need to be proactive in both demanding and using this data and information
One of the reasons the MMF has created ‘The Transparency Guide’ is to make all managers aware of the data and information they should have access to, and to encourage them to learn how that data and information can enhance their artists’ businesses.

If managers regularly put pressure on their business partners to share this data and information, and demonstrate how they are putting it to good use, more labels, distributors, publishers and CMOs will do the work necessary to make it available in a timely and user-friendly fashion.

That requires those business partners to spend money and possibly to change their policies. But providing the data and information identified in ‘The Transparency Guide’ is simply part of being in the music rights industry in the streaming age, meaning that is a necessary investment for music rights companies to make.

Those companies that make that investment should start to gain competitive advantage when it comes to securing the business of the more savvy and successful artists.

Therefore, there is a commercial incentive to become more transparent. Which means an industry that has long talked about the need for more transparency might actually start to provide it.